Recent Posts

About

Over the past 50 years in America, becoming a homeowner has developed into such a standard rite of passage that millions of people have signed on the dotted line without ever really stopping to consider the alternatives. Perhaps if more them had, we might not have had to watch the roof collapse on the real estate market.

When you look at the way we really live -- how long we stay in one place, what kind of amenities we want -- it turns out that home ownership isn't quite the universally advantageous deal we've all been led to believe.

Jailed in by the White Picket Fence

Let's first take a look at mobility -- our ability to pack up the kids and move for, say, a new job.

Imagine two friends working at the same job in Seattle -- one who owns a home and one who rents. After they both get laid off, a new job becomes available in Dallas. All things being equal, the renter is in a far better position to go after the new job. After all, the mess of selling a house can drag on for months.

In fact, the mobility of America's workforce right now is lower than it's ever been since the Census Bureau started tracking such statistics after World War II. Before 1980, about 20% of the population was mobile in any given year. Here's what has happened since.

Source: U.S. Census Bureau.

Being locked into a mortgage severely limits one's potential opportunities in an ever-changing job market.

The mobility conundrum becomes even more dire when you consider that the average age of a first-time homeowner has gone down over the past decade to 30. That means a large percentage of the first-time buyers are younger than 30 -- with their mortgages potentially impeding their career growth.

The Decision to Sell

Of course, the easy answer is to sell your house if you need to move for a job. But take a look at what happens to your dream home/investment.

In 2011, the National Association of Realtors found that the average home-seller had lived in their house for nine years. That means if you have a 30-year mortgage, about one-third of the house should be paid off, right?

Wrong. In fact, it's usually not until about the 21st year that an owner will have paid off just half of the principal on a mortgage. That's because the nature of an amortization schedule front-loads the interest payments to the bank, and back-loads the equity-producing payments on the house.

In essence, the average homeowner is simply paying rent for nine years to a bank instead of a landlord.

Even if you stay put for a long time, the financial payoff of buying a home is hardly a slam-dunk argument against renting. In fact, Yale economics professor Robert Shiller, who predicted the popping of both the dot-com and real-estate bubbles, has shown that after adjusting for inflation, home prices have remained virtually unchanged since 1890.

The reason is actually quite simple: Homes are "just manufactured goods. Houses in 20 years may have lots of new amenities ... we can't anticipate now. So people won't want these old homes," Shiller argues.

But With Today's Rates, I Can't Lose, Right?

Historically speaking, yes, it's a great time to buy. The 30-year fixed rate on a mortgage is as low as it has ever been.

But even if you own and you pay off your mortgage in 30 years, there's still no guarantee that you'll come out on top of a renter. Using The New York Times nifty calculator -- which takes into account inflation, closing costs, maintenance, and so on -- we see that renting is still a good option.

Imagine two friends live in identical $200,000 houses next to each other.

One friend, Spending Sammy, buys his house paying 10% down with a fixed 3.8% mortgage and a property value that increases 3% per year.

The other friend, Frugal Fred, pays $900 rent per month (more than Sammy's $840 mortgage), and his rent increases by 3% per year. Fred saves the equivalent of the down payment and any money from not paying for home improvements. Over time, Fred simply invests that money in a fund that matches the stock market's historical 8.8% return.

After 30 years, Sammy sells his house and they both move down to Florida for retirement. When all is said and done, Fred will walk away with roughly $90,000 more than Sammy -- and he didn't have to worry one bit about repairs and upgrades to his house!

Let's Be Clear: There's a Time and Place to Buy a Home

If it sounds like I think buying a home should be reserved for only the foolish, that's not the case. It's just conditional to what you want.

Search Millions of Home Listings

View photos of homes for sale and apartments for rent on AOL Real Estate

For some people, there's absolutely no price you can put on the social and emotional benefits of owning a house. If that's you, and you've considered all the alternatives, then by all means: Buy away!

But if you think you're not an adult until you've purchased a house -- or that by doing so you will guarantee the best, most secure returns on your money that you possibly can -- well then it's time for you to re-evaluate this aspect of American dream.

Motley Fool analyst Brian Stoffel currently rents an apartment with his wife. You can follow him on Twitter, where he goes by TMFStoffel.

Introduction to Preferred Shares

Add a Comment

300 Comments

Filter by:

Brian Sun

Hmmmmm.....do you all think the days that the masses owned homes are coming to a close (at least temporarily)? I'm doing my best to educate myself about personal finances to guarantee that I can one day own my own home. It seems to me that the first step is boost my credit score. I've been using Credit Sesame to do that for free. It seems great to me; thoughts?

When all cash flows are considered, renting costs less, which means you'll have more money to save & invest. Over the long run, the stock market averages +10%/yr.

So the 20% downpayment, 3-5% closing costs, 5-6% selling costs every time you move (average US home borrower moves every 7 years), property taxes, maintenance, insurance, is all money that could have been invested.

If you look at everything (all cash flows considered), you spend less money when you rent! Between property tax, insurance, maintenance, mowing the lawn, fixing the roof, etc. etc. plus the extra utility costs you're spending a lot of money that could be invested instead. What's wrong with renting??

Learn from the past people! (Of course they look at me like I'm crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from Insurance Panda. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).)

Nobel Prize winning economist Robert Shiller was one of the few people who accurately called both the stock market crash of 2000, AND the real estate crash of the late 2000s.

What a one-sided, less than deep, analysis by a RENTER. Make yourself feel good, Brian. Where can you find a $200K house for rent for $900/month??? I recently was moving to Omaha -- a low-priced housing market, and a piece of crap house would rent for well over $1200/mo. Even with minimal downpayment we were able to "buy" a house with mort and escrow for about the same. Recently looked at housing in Milwaukee. Same deal. Not to mention assumptions about growth and increases in rent, etc. On yur isde, though, you didn't increase the taxes on the house, which does happen pretty frequently.

What a one-sided, less than deep, analysis by a RENTER. Make yourself feel good, Brian. Where can you find a $200K house for rent for $900/month??? I recently was moving to Omaha -- a low-priced housing market, and a piece of crap house would rent for well over $1200/mo. Even with minimal downpayment we were able to "buy" a house with mort and escrow for about the same. Recently looked at housing in Milwaukee. Same deal. Not to mention assumptions about growth and increases in rent, etc. On yur isde, though, you didn't increase the taxes on the house, which does happen pretty frequently.

We currently are renting a townhouse after having to short sell our house. I do want to own a home again one day, but I love being a renter now. If something is broken, it doesn't come out of our pockets. The rent is $400 less than our old mortgage so we are able to save money for once. We were forced to short sale because my husband got a better job out of state and the house was not selling at what we considered a fair price (which was our break even point). There were too many other short sales driving down the market, so we had to jump on the bandwagon. So I guess we will be renters for awhile, but I actually am really digging this nice little break for now. And the next time we buy a house, it will be with lots of money in the bank!

When we bought our home our mortgage was around 600.00 a month rents were close too 800.00. 29 years later rents here are about 2100.00 a month, mortgage payment = 0.00. Even with the housing meltdown the house is worth 4-5 times what we paid.

Speaking based on my experiences on being a renter for 20+ years, I don't ever want to go back to renting EVER again. Why? Every month, my "rent money" GOES TO ME and not another mortgage holder called a "landlord." I also like the location where my home is. 360 degrees all around me is my workplace, shopping centers, the beach, restaurants, freeways, trees, parks, and so on. It's also nice not to hear your neighbors flushing their toilets or waking you up in the middle of the night. So your sanity is much better as well.

Speaking based on my experiences on being a renter for 20+ years, I don't ever want to go back to renting EVER again. Why? Every month, my "rent money" GOES TO ME and not another mortgage holder called a "landlord." I also like the location where my home is. 360 degrees all around me is my workplace, shopping centers, the beach, restaurants, freeways, trees, parks, and so on. It's also nice not to hear your neighbors flushing their toilets or waking you up in the middle of the night. So your sanity is much better as well.